چکیده انگلیسی

Conventional economic theory, applied to information released by listed companies, equates ‘useful’ with ‘price-sensitive’. Stock exchange rules accordingly prohibit the selective, private communication of price-sensitive information. Yet, even in the absence of such communication, UK equity fund managers routinely meet privately with the senior executives of the companies in which they invest. Moreover, they consider these brief, formal and formulaic meetings to be their most important sources of investment information. In this paper we ask how that can be. Drawing on interview and observation data with fund managers and CFOs, we find evidence for three, non-mutually exclusive explanations: that the characterisation of information in conventional economic theory is too restricted, that fund managers fail to act with the rationality that conventional economic theory assumes, and/or that the primary value of the meetings for fund managers is not related to their investment decision making but to the claims of superior knowledge made to clients in marketing their active fund management expertise. Our findings suggest a disconnect between economic theory and economic policy based on that theory, as well as a corresponding limitation in research studies that test information-usefulness by assuming it to be synonymous with price-sensitivity. We draw implications for further research into the role of tacit knowledge in equity investment decision-making, and also into the effects of the principal–agent relationship between fund managers and their clients.

مقدمه انگلیسی

Fund managers are the primary investment decision makers in the stock market and so play a central role in the allocation of economic resources. In making their investment decisions they rely heavily on published information, aspects of which may be clarified by a company’s investor relations team. In the UK (and in somewhat different forms in other markets) they also meet regularly, in private, with senior executives of the companies in which they invest (Reuters, 2011). Market regulation prohibits the disclosure of price-sensitive information in these private meetings (FSA, 1996). Yet conventional economic theory suggests that information is not useful to investors if it is not price-sensitive (Fama, 1970 and Kothari, 2001). Accordingly, at least when viewed through the lens of conventional economic theory, it is difficult to understand what information such meetings provide which might help fund managers in their investment decisions. Yet, in the prior research that we review below (and that our own research supports), these meetings are perceived by fund managers not only as important but as the primary source of information to inform their investment decisions ( Barker, 1998, Holland, 1998, Lok, 2010 and Reuters, 2011). What is happening here?
This apparent paradox is economically important. Conventional economic theory appears to suggest that the considerable investment of time by senior company managers and fund managers in meeting one another does not yield any return. More fundamentally, the importance ascribed to such meetings invites us to refine our understanding of the rationality and effectiveness of capital resource allocation decisions on stock markets.
In what follows, drawing upon interviews with fund managers and CFOs, supported by direct observations of the meetings between them, we explore three possible, and non-mutually-exclusive, (theoretical) explanations for the apparent paradox.
The first possibility is that, by constraining ‘useful’ to mean ‘price-sensitive’, conventional (neoclassical) economic theory is too narrow with respect to useful information. Our research points to two reasons to conceptualise useful information more broadly. The first concerns the tacit nature of much knowledge, and the associated need for rich face to face interaction through which information can be effectively communicated and interpreted. The second concerns the narrow practical scope of the concept of price-sensitive information, which fails to take account of uncertainty and the related value of subjective evaluations of management capability. The implication here is that the actual investment decision making process of fund managers differs from that assumed by neoclassical theory. Our qualitative research suggests that both fund managers and CFOs distinguish between short-term corporate performance horizons of about 2 years, where quantitative forecasts are relatively firm, information is tightly controlled, and the scope for anticipating market movements is very limited, and longer term horizons, where performance will depend on management decisions that have yet to be taken, in response to situations as yet unknown, in respect of which information is not formally price-sensitive. For fund managers, privileged access to corporate management allows them to judge whether company performance over this longer period is likely to differ from current market expectations.
The second possibility is that the apparent paradox arises because fund managers place an excessive confidence and importance in the information gleaned from company meetings; the paradox arises here from a failure of fund managers to act with the rationality that economic theory assumes. Notwithstanding the arguments above for the usefulness of non-price-sensitive information, and thereby the possible credibility of fund managers’ claims to derive informational value, an obvious question is whether the short, infrequent, formal and (typically) formulaic meetings we observed can in fact provide a rational basis for such (necessarily subjective) judgements of management capability. It was clear from our interviews that fund managers think, or at least hope, they can. Yet we suggest several reasons to question whether the fund managers actually are able to adopt the trading strategies they describe, and whether the access to senior managers provided by the meetings can in fact give them the competitive advantage they claim.
Finally, the third possible explanation is that the primary value of the meetings for fund managers is not related directly to their investment decision making but rather to the claims of superior knowledge that they can make to clients in marketing their active fund management expertise. We argue that while it is difficult in practice to distinguish between subconscious, irrational bias, and conscious, rational misrepresentation, prima facie there is an agency problem in the fund manager–client relationship. Active fund managers’ claims to be able to beat the index on the basis of their superior knowledge allow them to charge clients, such as the trustees of pension and endowment funds, a premium over passive index-based fund management.
The paper contributes to the literature in the following ways. First, we challenge the assumption, held in conventional economic theory and common in market-based accounting research, that ‘useful’ and ‘price-sensitive’ are synonymous. Our findings suggest that ‘useful’ is a broader concept, the understanding of which requires a greater focus on the role of tacit knowledge in investment decision making, especially with respect to relatively uncertain information relating to periods beyond the short term. Second, our evidence concerns not just the actual and perceived usefulness of information from company meetings, but also the claims made by fund managers to their clients with respect to this usefulness. We therefore also identify a potentially important principal–agent problem. Overall, these contributions to the literature can be summarised as follows. Conventional economic theory does not support the existence of the meetings that are the focus of this paper. The importance of the meetings therefore suggests, in a classical hypothetico-deductive sense, that the theory must be rejected in this context. In its place, we offer three alternative theories. We find evidence in support of each, and none is rejected. We therefore propose further research to test the validity and implications of these theories.
Our paper also has a potentially important policy implication, relating to the selective disclosure of information that is useful but not price-sensitive. This concerns a possible trade-off that would result from a greater restriction on the selective disclosure of information, for example in the form of a prohibition of private meetings between companies and fund managers. This trade-off would be between, on the one hand, greater equity from the restriction of privileged access to information and, on the other hand, lower efficiency from constraining the flow of information and, as a result, compromising the stock market’s allocation of economic resource. Further insight into this policy implication would result from more evidence relating to each of the three theoretical possibilities identified and explored in our paper: specifically, the questions of whether the informational benefits of company meetings are genuine, falsely perceived, or misleadingly claimed. The market efficiency argument rests upon evidence in support of the first of these three possibilities, and it would lose force in the face of evidence supporting the second or third.
The paper is structured as follows. The next section comprises an exposition of the theoretical foundations of the paper. This is followed by a review of prior research and a description of our own research design. We then provide evidence supporting the existence of the apparent paradox that we seek to explain and then, in each subsequent section, findings and analysis relating to each of our three possible explanations for the apparent paradox. The final section of the paper presents conclusions and draws out implications for future research.

نتیجه گیری انگلیسی

Stock market regulation concerning price-sensitive information has a neoclassical economic foundation, whereby information that is useful is assumed to be synonymous with that which is price-sensitive. Informed by qualitative interview and observation based study of actual investment decision making, this paper calls into question that core assumption.
Conventional theory is silent on the process by which information is communicated and understood, yet for the soft information that is most valued by fund managers, the method of communication and the associated process of understanding are inseparable from investment decision-making. Through company meetings, tacit knowledge is obtained efficiently and uniquely from the communicational richness of the face-to-face encounter. The meetings are useful because they enable fund managers to frame or make sense of the plethora of hard data provided by the companies themselves and by analysts. They are a necessary precondition for fund managers to be in a position of being able to compete, and so they are useful even if they serve only a confirmatory or updating purpose, with no implication for a change in the share price.
Conventional theory also fails to make a distinction between the short term and the medium to longer term. In the short term, conventional assumptions concerning the objective nature of information and its interpretation can be said to hold, making ‘price-sensitive’ a reasonable approximation for ‘useful’. Beyond the short-term, however, the informational context changes significantly and, for the most part, the concept of price-sensitivity ceases to apply. In contrast with conventional theory, the fund managers and CFOs in our study both made this distinction between relatively short-term corporate performance horizons of about 2 years, where quantitative forecasts are relatively firm and objective, information is tightly controlled, and the scope for anticipating market movements is very limited, and slightly longer term horizons, where performance will depend on management decisions that have yet to be taken, in response to situations as yet unknown, and with respect to which information is subjectively communicated and understood and is not formally price-sensitive. Beyond the short term, the fund managers were effectively making decisions under conditions of either fundamental uncertainty or unquantifiable information, the very existence of which is denied by the probabilistic framework of neoclassical theory and generally assumed to be prevented by the regulatory framework regarding price-sensitive information, which is largely based on that theory. In the view of fund managers, it is the privileged access to corporate management that allows them to judge whether, over this longer period, corporate management attitudes and abilities will result in better or worse company performance than the market currently expects, performance that will find its way into the share price, both directly through revised forecasts and indirectly through changes in market sentiment, within roughly a 12–18 month period.
These findings suggest opportunities for future research, with respect to both theory and policy. The challenge to conventional theory is that, by taking into consideration tacit knowledge and the presence of uncertainty beyond the short term, the synonymity of ‘price-sensitive’ and ‘useful’ cannot be said to hold. This makes conventional theory limited in scope and it calls for new theorising to fill the gap. We have, in effect, a model that applies only to the short term, and a need therefore to supplement this with theory applicable beyond the short term, that embraces the roles of tacit knowledge and uncertainty. The associated challenge for policy is whether the characterisation of information in neoclassical theory, which forms the basis of the regulation of private information flows, is unduly narrow. This involves a welfare judgement, in the form of a trade-off between efficiency and equity. If, on the one hand, the definition of price-sensitive were to be broadened, for example to prohibit private meetings in recognition of their role in building tacit knowledge, then it would be reasonable to assume a corresponding efficiency loss in economic resource allocation, either because investors would not understand their investments as well or because, in the absence of a requisite level of confidence, they would be unwilling to invest in the first place. A further reason to expect losses arises to the extent that fund management institutions serve a public interest role in corporate governance, by monitoring performance and calling executives to account. Moreover, it could be argued that there is little justification for imposing each of these losses, because the information conveyed in the meetings does not, by nature, have a simple and unambiguous value for trading purposes. Instead, it must first pass through the subjective, cognitive filter of the fund managers’ analytical process, which is in itself proprietary and so a legitimate basis from which to seek private trading gains. On the other hand, stock market regulations regarding price-sensitive information are designed to promote equity, yet they do not ‘catch’ the private acquisition of non-price-sensitive tacit knowledge that we describe here. Accordingly, a prohibition of private meetings would level the playing field if the meetings either communicate information that is subjective yet potentially widely useful (such as the CEO’s opinion on expected growth in the market) or if they enable the acquisition of tacit knowledge that could only be achieved face-to-face (for example through debate about how to interpret expected growth for the company in question). Broadening the definition of price-sensitive could therefore be argued to lead to socially desirable equity gains, by denying privileged access to a privileged few. Overall, the policy trade-off here from broadening the concept of price-sensitivity is far from straightforward and is worthy of further research.
In their most modest form, fund managers’ claims regarding the usefulness of meetings are surely credible: an investment decision informed and confirmed by face-to-face interaction with senior management is surely preferable to one without. As we consider stronger claims, however, we must question whether fund managers actually are able to adopt the trading strategies they describe, and whether the rich contextual information provided by the meetings can in fact give them the competitive advantage they claim. We acknowledge that we cannot simply draw a line between fund managers’ claims that are legitimate and those that are excessive, and there is considerable scope here for further research, perhaps of an experimental nature. Our evidence does, however, suggest that it is asking a lot for infrequent, formal, brief and carefully-managed meetings to impart the whole of the competitive informational advantage claimed, especially when the same process is replicated across competitor fund managers. Such scepticism is supported by the CFOs’ reported doubts over the level of sophistication of the information conveyed, as well as by their focus on shorter-term information, which fund managers and CFOs alike regard as having little or no value for trading purposes. The balance of empirical evidence in the literature also supports this position, as it finds that active fund managers do not outperform the index. Indeed, there is no independent evidence to support the claimed distinctive strengths of fund managers, which appear to rest less on technical skills of the type associated with the professional analyst and more on fund managers’ subjective abilities to interpret subjective information, not least concerning the quality of management.
Such scepticism does not, however, imply that investor irrationality should be viewed as an exclusive explanation for the apparent paradox explored in this paper. It is entirely consistent, for example, for the meetings to be valuable as a means of both framing the interpretation of public information and for assessing the subjective qualities of management, yet for these benefits to be perceived to be greater than they are. It is also consistent for the meetings to be a necessary condition for informed investment decisions, yet not sufficient for the competitive advantage that enables outperformance. In short, useful tacit knowledge may well be acquired, just not to the extent that the fund managers’ like to believe. In exploring this gap between rational and irrational claims regarding the usefulness of meetings, there is room for a variety of interpretations in terms of cognitive bias, post hoc rationalisation and sense-making. These interpretations have in common that the fund managers (irrationally) place excess confidence in the informational value of meeting with companies. The need for further research in this area is clear: if the activities of the fund management sector, and in part those of business leaders, are indeed invested heavily in a deluded process, leading to irrational investment decision-making, it is economically important to understand why this is the case.
It is also possible, however, that the fund managers are not acting irrationally at all, but are instead knowingly or subconsciously making false claims, to support a non-trading purpose. The fund managers are certainly aware that, as a group, they all share access to corporate management, and that the only evidence that their information on management is valuable is their own stated perception that it is so. The CFOs, meanwhile, are readily compliant in the fund managers’ charade. They need to maintain the fund managers’ goodwill in order to support their share price and operating autonomy, and so are motivated to satisfy their part of the meetings, whether or not the information that they provide imparts a competitive informational advantage. Both parties may therefore doubt the informational purpose of the meetings, yet still they meet. Here we have argued that that there is at least strong prima facie evidence of a significant agency problem, as fund managers sell their services on the basis of performance claims they perhaps knowingly cannot support. Indeed, whether or not the meetings convey useful information, fund managers have a clear incentive to represent them in this way to clients, because by so doing they help to justify active management fees. In turn, this remunerates fund managers and enables them to enjoy the enactment of their roles. In effect, the fund managers’ clients become compliant in funding these agency costs. In turn, the pension fund trustees and others instructing the fund managers are themselves agents acting on behalf of the beneficiaries of the funds and endowments being invested, so the agency problem repeats itself at this level as the interests of the principals in an optimal balance between risk and return appear to be sacrificed to the behavioural motivations of their agents. Our exploration of the company-fund manager relationship therefore suggests the need for further research into the related relationship between fund manager and trustee. Highlighting the neglect of agency relationships in investment decision making is an important corrective to the assumption that the investor and shareholder are synonymous, and that agency problems are for the most part to be found in the role of executives or the interplay between majority and minority shareholders. The prima facie evidence here is that agency costs are writ large in the very significant channelling of equity investments through active fund management.
Our suggestions for further research therefore take the form of extending our three, non-mutually-exclusive explanations for the usefulness of non-price-sensitive information. First, the synonymity of price-sensitive and useful ceases to hold beyond the short term, with implications for theory and policy. Second, fund managers appear to be excessively confident in the value of non-price-sensitive information, with implications for economic efficiency. Third, the exploitation of agency relationships explains a demand for information that is not directly related to investment decision-making, implying significant, hidden agency costs. In relation to these areas we suggest the potential for each to be usefully informed by further qualitative empirical research. Our primary focus here has been on the informational value of private meetings but this could readily be extended to the related processes of portfolio selection and proprietary quantitative modelling which in practice frame these meetings, as well as to the marketing of fund management expertise to existing and prospective clients.